Hypotheses related to Sample 1

As discussed in the literature review, managers are often prone to irrational empire building.

It might be that the management of a company which chooses to cross-list its shares on a foreign exchange and uses those shares to make acquisitions, is embarking on an ultimate empire building journey: they want to conquer there world, so to speak. This is driven by personal self interest of the management of the acquiring company; by growing the size of the company, the managers are able to get more power, prestige and pay (Pike and Neale, 2003).

This effect is likely to be even more dramatic in a cross-listing setting as the managers of European companies are sure to get more air and press time in the U.S. by making more and larger acquisitions in the U.S., which is made possible by the existence of their cross-listed stock as a medium of exchange in M&A. This suggestion is in line with Morck and Schleifer

(1990), who report that when private benefits to the management are especially large, the managers might carry out shareholder wealth destroying acquisitions.

A straight forward test of managerial hubris is to check how visible a company is in prestigious business publications. As I argue that managers of cross-listed companies are more prone to irrational empire building and hubris, then it is likely that a cross-listed company is more visible in prestigious publications surrounding the announcement of the acquisitions than a non-cross-listed company. Hence, my first hypothesis:

: Cross-listed companies are more visible in prestigious business publications than their non-cross-listed peers around takeover announcements

A large number of publication hits entails that the company‟s management is likely to have deliberately tried to increase the company‟s, as well as their own, visibility in these publications in order to increase their prestige. One way to do this is to engage in flashy corporate transactions, which are sure to get publicity to the company, although they would not be beneficial to the shareholders. Thus, I form my second hypothesis as follows:

: The higher the visibility of the acquirer in prestigious business publications, the lower the returns from M&A

As the development of a viable M&A currency is one of the key motivators for cross-listing in the first place (Eiteman et al. 1998; Pagano et al. 2002; JP Morgan, 2005; Citigroup, 2005), it is likely that managers of companies, which have cross-listed at least partially for this reason, are eager to use the currency to make acquisitions, irrespective of any good takeover opportunities being present. This is somewhat analogous to the classical free cash flow problem (Jensen, 1986), as cross-listed companies in effect have large amounts of viable takeover currency in their possession. One might even say that they can in effect print acquisition money. This kind of an incentive is not present for non-cross-listed companies, indicating that non-cross-listed companies are able to use more judgment and common sense in their M&A, and are therefore less prone to hubris than cross-listed companies.

When one considers the fact that management of cross-listed companies are more prone to empire building, and the fact that cross-listed companies have large amounts of viable takeover currency in their possession, this raises the questions on the rationale behind these

acquisitions. Tolmunen and Torstila (2005) provided first evidence on the dubious nature of the acquisitions made by cross-listed companies as they showed these acquisitions to be larger and more stock-financed than acquisitions by non-cross-listed companies. The possibility to use cross-listed stock as acquisition currency also makes it easier for cross-listed companies to bid for public targets and, hence, cross-listed companies are more likely to acquire public companies than their non-cross-listed peers, indicating worse acquisition performance.

Furthermore, as cross-listed companies have been shown to be more active acquirers than their non-cross-listed peers (Tolmunen and Torstila, 2005), they are likely to use less scrutiny in selecting their targets and, thus, end up bidding also for companies that are outside their industry and have a poor strategic fit. This implies potentially adverse outcomes for the shareholders of cross-listed companies as diversifying acquisitions have been shown to lead to shareholder value destruction (Graham, Lemmon, and Wolf, 2002).

The above hypothesized tendency of cross-listed companies to engage in stock financed M&A, where the target is a large public company having a poor strategic fit is likely to be only symptom of a larger problem: irrational managerial empire building. As the egos of the management grow to huge proportions, the acquisitions made by them are likely to be suboptimal from the viewpoint of the shareholders of the company. I argue that as the shareholders are likely to acknowledge these tendencies, they should react unfavourably to the takeover announcements. Hence, I form my third hypothesis as follows:

: Cross-border acquisitions by cross-listed acquirers are less value creative than cross-border acquisitions by non-cross-listed bidders

It has to be noted, however, that not all prior studies provide evidence that the deals made by cross-listed bidders are worse than those of their domestically listed peers. Burns et al. (2007) argue that the home bias of U.S. investors might be alleviated by a U.S. cross-listings as bonding occurs, enabling cross-listed companies to pay lower premiums. However, Burns et al. more specifically note that cross-listers pay on average 10% less premium on their equity-financed deals than non-cross-listed bidders pay on cash deals. Cash and stock deals cannot, however, be directly compared, and it is impossible to say which of the above deals would be better for the bidder‟s shareholders.

It is generally acknowledged that agency costs tend to be more substantial for larger companies (see Jensen, 1986; Schin and Kim, 2002), which are likely to have a larger amount

of atomistic shareholders, who have very limited possibilities for controlling the actions of the management. Furthermore, Jensen notes that increased size of the firm increases the resources under the management‟s control. These resources tend to, more often or not, be used to shareholder value destroying activities such as wealth destroying acquisitions. The increase in the size of the company is also sometimes associated with the fact that the company might be overvalued, creating additional incentives for companies to engage in equity-financed M&A.

Theory and empirical evidence seems to suggest that agency costs increase as the size of the company increases. However, this effect is likely to be even larger for cross-listed companies than for those companies that are only domestically listed, due to the fact that foreign equity is regarded as inferior to domestic equity in the U.S.. This results in a situation, where only cross-listed companies are able to fully utilize their size and other resources, as well as in some cases overvaluation of their stock, in making transatlantic acquisitions. Hence, I state my fourth hypothesis as:

: The difference in acquirer gains between cross-listed and non-cross-listed companies is higher for larger companies

As discussed in section 3.2, bidder returns in M&A have been shown to be negative in some studies, while other studies indicate that the acquirers roughly break even. However, very few researchers suggest that M&A transactions create wealth for the acquirer on average, at least when studying the question with recent data concerning M&A transactions between developed world targets and developed world bidders.

It seems that the earlier evidence would indicate that also the U.S. acquisitions of European companies cross-listed in the U.S. would be at most break-even endeavors for the acquiring company, if there is no additional evidence or theory suggesting that these companies would be likely to make exceptionally good acquisitions. However, as discussed earlier, the acquisitions made by foreign companies cross-listed in the U.S. are likely to be even worse than those acquisitions made by their domestically listed peers, due to the high number of potential agency and hubris costs, which the decision to cross-list seems to indicate. Hence, I state my fifth hypothesis as:

: Acquisitions by cross-listed acquirers are wealth destroying